I am the Founder of Community of Liberty, a chapter based organization committed to pursuing the art of living in liberty, a member of the Publication Committee of the Claremont Review of Books, an Advisor to TheGold StandardNow.org, and a juror for the Bastiat Prize for Journalism. I have just published with my co-author Ralph Benko the booklet, "The 21st Century Gold Standard: For Prosperity, Security and Liberty," now available as a free download at AGoldenAge.com. I bring to my columns an extensive background in the investment management business, including my experience as an equity portfolio manager, strategist, president of my former firm’s retail sales and marketing subsidiary and member of the parent firm’s management committee. As such, I have been a student and observer of the political/economy and its affects on markets, businesses, and my own business for more than 30 years.

Tim Geithner Covers for Corruption On Pennsylvania Avenue

Last Friday, Treasury Secretary Timothy Geithner charged in a Wall Street Journal op-ed that those who oppose the Obama Administration’s regulatory regime for the financial services industry “seem to be suffering from amnesia about how close America came to complete financial collapse under the outdated regulatory system we had before Wall Street reform.” Au contraire, Secretary Geithner, it is you who choose to ignore and misrepresent the lessons of the financial crisis by perpetuating the myth that the source of the crisis was a lack of regulation.

First, your essay glosses over the central role the federal government played in creating the crisis. In particular, the government through Fannie Mae and Freddie Mac directed $5.2 trillion (that is trillion with a “t”) of capital to increase the supply of mortgages. In addition, it passed a law that required banks to make billions of dollars in loans to individuals that were unlikely to pay off the loans, in the end with 0% down.

In 1998, Fannie Mae announced it would purchase mortgages with only 3% down. And, in 2001, it offered a program that required no down payment at all. Between 2001 and 2004, subprime mortgages grew from $160 billion to $540 billion. And between 2005 and 2007, Fannie Mae’s acquisition of mortgages with less than 10% down almost tripled. These loans are now known as “subprime” and “alt A” loans. At the time they were made, Fannie Mae and Freddie Mac encouraged their issuance by lowering their standards and buying them up from the now vilified mortgage brokers, S&Ls, banks and Wall Street investment banks.

This activity was not due to a lack of regulation or oversight as you claim. Both companies are under the direct supervision of a federal regulator and Congress. At the time these loans were being purchased by these two Government Sponsored Enterprises, their actions were defended by many in Congress who, led by Senator Chris Dodd and Congressman Barney Frank, saw such reckless lending as a successful government initiative.

At the same time, the easy money policies of the Federal Open Market Committee, of which you were a voting member, were feeding an asset bubble in residential real estate, providing what proved to be an irresistible lure not only for speculators, but also for American families trying desperately to buy a house before inflation robbed them of their chance for home ownership.

Yes, mortgage brokers and banks encouraged reckless borrowing, though many who borrowed, with a little honest reflection, could have known that they would be unable to meet the financial obligation of paying the mortgage that they were using to buy a house that they could not afford. Nor does any of this excuse the poor judgment of those on Wall Street who levered their firms’ balance sheets so that even a 4% loss on their investments would leave them either bankrupt or in need of a bailout.

But, the culpability of those in the private sector should not be used to cover up or excuse the irresponsible behavior of those in the federal government. The self-regulatory check normally provided by markets on activities that are likely to lose money — lenders backing away — was simply blocked by the government’s intervention in the capital markets. As you must know, six top executives of Fannie Mae and Freddie Mac have been charged by the Securities and Exchange Commission with securities fraud for hiding the size of the purchases of low quality mortgages from the market.

In addition, the normal check on excessive leverage provided by unwilling lenders was overwhelmed by the perception, now validated, that Fannie Mae and Freddie Mac debt were backed by the full faith and credit of the federal government. This created a willing buyer backed by the federal government with unlimited access to credit markets and a trillion dollar budget. No wonder S&Ls and Wall Street found ways to satisfy the demand. Blaming a lack of regulation for the subsequent losses is political spin meant to cover up the greed and corruption on Pennsylvania Avenue that led to the crisis.

Second, your claim that increased regulatory oversight would have prevented the crisis requires a credulous belief in the wisdom and courage of those in power. Regulators with all of the necessary powers have failed in their most basic task of preventing fraud including Bernie Maddoff’s Ponzi scheme, and now the still unexplained disappearance of $1.6 billion of customer money at MF Global. Yet, you ask us to believe tens of thousands of pages of new regulations will somehow empower you and other elite public servants to prevent another financial crisis?

As we know now, you and the other members of the Federal Open Market Committee in 2006 did not grasp the implications of the then faltering housing market for the general economy or the health of the banking system. As a consequence, you and your colleagues did not use the powers you had to head off the financial crisis when there was still plenty of time to act. As former Prime Minister Tony Blair writes in his memoir, A Journey of My Political Life, an important contributor to the financial crisis was a failure “of understanding. We didn’t spot it…it wasn’t that we were powerless to prevent it even if we had seen it coming; it wasn’t a failure of regulation in the sense that we lacked the power to intervene. Had regulators said to the leaders that a huge crisis was about to break, we wouldn’t have said: There’s nothing we can do about it until we get more regulation through. We would have acted. But they didn’t say that.”

Third, the new regulatory regime for the financial industry created by the Dodd-Frank bill — ironically named after two of the perpetrators of the financial crisis — omits any reform of Fannie Mae and Freddie Mac. Yet, unlike the commercial and investment banks who have repaid the government bailout money, these two state sponsored financial giants have cost taxpayers more than $140 billion and are seeking billions more in bailout funds. At the same time, HUD is moving forward on issuing new rules that would support racial quotas for bank mortgages, which no doubt will again force banks to make loans to individuals who cannot afford them.

In light of this evidence and your own experience, your promise that a new, expansive regulatory regime reduces the risk of financial crisis is not credible. The regulatory maze created by Dodd-Frank not only robs the private sector of real resources that otherwise would be committed to allocating capital to credit worthy borrowers, it also undermines market skepticism essential to preventing systemic risk. In addition, it puts even more power in the hands of a few individuals who, like you, are fallible, rather than dispersing power among market participants.

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The record is very clear that both Fannie Mae and Freddie Mac were under political pressure to use their lower cost of funds created by the then implicit Federal guarantee behind their debt to making “housing more affordable” especially for low income and minorities. This included reducing their lending standards and encouraging the issuance of sub-prime and alt A mortgages by S&Ls, banks and mortgage brokers.

Fannie Mae and Freddie Mac were not pure private companies. They were “Government Sponsored Enterprises” or GSE’s in Washington speak. As it turns out, this meant their profits went to their owners, but their losses are covered by U.S. tax payers. Moreover, unlike any other U.S. corporation listed on the major exchanges, they did not have to file a 10-k with the SEC.

The Republican Party majority was unable to overcome staunch opposition by Democrats led by Chris Dodd in the Senate and Barney Frank in the House to curtail these two organizations or reform their operations. However, I did not single out the Democratic Party because the corruption crossed party lines.

Actually, for those of us who had a front row seat since 1998, you’re observations are as accurate as the ones spelled out by Geither’s press release from last week. The problem was not lack of regulation or too much regulation.

The problem was no enforcement. As former Prime Minister Tony Blair states in your article they didn’t understand what was going on during the housing bubble and prior to 2007 didn’t care. Why? Because for 10 years prior to the crash every government entity from the Federal government to the local municipality was profiting from the housing market.

During the boom, Fannie/Freddie had some of the most restrictive underwriting guidelines in housing. They only loosened their guidelines and become more involved in subprime lending because of pressure from their investors not because Barney Frank forced them too.

There is a misconception out there and you seem to want to promote it that Fannie Mae and Freddie Mac were and are government agencies. They were not. Fannie was privatized in 1967 under Lyndon Johnson and Freddie Mac was privatized in 1980.

Conservatives like to point the finger for this mess at Barney Frank. Yet, the GOP had a majority of the members the House Financial Services Committee until January of 2007 and controlled the committee. Did Frank have influence to sway policy about Fannie/Freddie? Yes. Did he have power to change anything from 1999-2007? No.

The financial crisis is reflective of what happens when you dumb down your education system and feed on the narcissism of the masses because then these same uneducated people elect a politicians who they “would rather go have a beer with” rather then the person who has a fundamental grasp of Econ 101.

The problem is not just liberal politicians, its the conservative ones as well. Most politicians lack the knowledge of finance and economics and the level of knowledge decreases the more localized you go.

Actually, for those of us who had a front row seat since 1998, you’re observations are as accurate as the ones spelled out by Geither’s press release from last week. The problem was not lack of regulation or too much regulation.

The problem was no enforcement. As former Prime Minister Tony Blair states in your article they didn’t understand what was going on during the housing bubble and prior to 2007 didn’t care. Why? Because for 10 years prior to the crash every government entity from the Federal government to the local municipality was profiting from the housing market.

During the boom, Fannie/Freddie had some of the most restrictive underwriting guidelines in housing. They only loosened their guidelines and become more involved in subprime lending because of pressure from their investors not because Barney Frank forced them too.

There is a misconception out there and you seem to want to promote it that Fannie Mae and Freddie Mac were and are government agencies. They were not. Fannie was privatized in 1967 under Lyndon Johnson and Freddie Mac was privatized in 1980.

Conservatives like to point the finger for this mess at Barney Frank. Yet, the GOP had a majority of the members the House Financial Services Committee until January of 2007 and controlled the committee. Did Frank have influence to sway policy about Fannie/Freddie? Yes. Did he have power to change anything from 1999-2007? No.

The financial crisis is reflective of what happens when you dumb down your education system and feed on the narcissism of the masses because then these same uneducated people elect a politicians who they “would rather go have a beer with” rather then the person who has a fundamental grasp of Econ 101.

The problem is not just liberal politicians, its the conservative politicians as well. Most politicians lack the knowledge of finance and economics. The level of knowledge decreases as the elected office becomes more localized.

Tim Geithner should be thankful for amnesia; it’s the only thing that allowed him to win his current job, and to keep it.

So, a refresher. In November of 2003, Tim Geithner became president of the NY Fed. His job description included regulation and oversight of NY-based investment banks, supervision of their capital ratios, and even supervision of the ratings agencies. It was because of his own spectacular failures in these areas that Wall Street blew itself up.

Yet, he was tapped by President-elect Barack Obama for a big promotion to Treasury Secretary, at which time we learned–unsurprisingly–that the NY Fed president and SecTreas nominee was too stupid to follow the elementary Yes/No prompts on his TurboTax software, the same tax-preparation package that is used by tens of millions of Americans without any problem whatsoever.

No, amnesia doesn’t necessarily cause financial crises. But having stupid people in important positions certainly does. And Tim Geithner–by his own sworn testimony to Congress–is as stupid as they come. Little wonder nothing is working.

“If the lesson of the financial crisis is as you say — that big government is the tail wagged by the big-finance dog — then how can more big government reduce the risk of the next financial crisis?”

The notions of big an small government get confused some times so let us clarify this by separating an effective government versus an ineffective government.

An effective government promotes productivity through a variety of incentives. Productivity can be measured on a macro scale by dividing real gross domestic product by the total amount of debt outstanding – seen here:

Well yes but… I’ve been in this industry 20 years. Private label (Wall Street) created subprime – yes FNMA/Freddie bought this stuff and were pressured. They also have reps and warrants hence all the repurchase requests. It only takes one bad apple or better stated “The rate of the leader sets the pace of the pack” Wall Street was the leader here. Problem was massive loss of market share with the government programs and GSE’s – FHA had a less than 1% market share in AZ in 06 and look at them now. Also, I believe the down payment issue is being way overstated – I really was the blowing out of the debt ratios that had the impact. Take stated income or no doc’s – they used to have a rent/mortgage multiplier and wanted pretty good credit. The multiplier was a way to “backward” underwrite and stated if you have a clean rent or mortgage payment history, we will ask no other questions but you are limited to 1.5% of that payment amount on PITI- then that was taken out and salaries.com came in and that, just like appraisals, became bloated based on information entered. GIGO. More than anything though it was 2 things in my opinion. Disposition of property – buying primary but was really investment – all the lenders required was a “new” lease for the “new” tenants that were to move in when you moved to your new home – this was incredible in usage and created a situation based on the irrational exuberance of all concerned where even someone with assets, credit, job time, etc could not hold when all tipped. The second was the use of the 80/20′s – these created so many problems and the 80 first actually was underwriting if the borrower put down 20% so rules (DTI, credit scoring) was much more lenient. The 20% were mostly helocs and those have the same underwriting as a car loan or credit card – about zero. Subtle changes took this market to the edge of the cliff and then over. But again I agree with the assertions in the article and especially concerned since our government and regulators are elected to curb this behavior and not encourage it and in some cases personally profit from it -

A sick relationship exists between the two and each is absolutely dependent on the other to perpetuate their own dysfunction. One could not have become as bad as they are now without the other’s help. To nobody’s surprise, each is now trying to portray the other as the bad guy and themselves as the good guy. For public relationship purposes only, they both want to make us believe that they have learned their lessons and have parted ways – that’s only for public consumption and nowhere near the truth. Congress doesn’t regulate anything well (look at any program) and especially those things that serve them well but they have a need to make the populace believe that they do and they’re working overtime to create and maintain a vast array of illusions. Do you ever feel that Congress keeps your attention constantly shifting from one crisis to another? Spinning plates is what comes to my mind when I think of Congress – they have so many plates ready to fall and crash that they are frantically running from one to another just as it they are about to fall and new ones keep getting added. It’s not a matter of ‘if’ they will come crashing down (nature’s laws trump man’s laws every time) but just when. For votes or money and sometimes both, Congress has made so many bad alliances on so many different fronts that they can’t all continue to survive; we’re at the point where something has to give. Look at what just this one plate crash cost us! A line from an old western TV series has stuck in my mind since my teens: “God save us from those who do in the name of good.” A few more come to mind: “The road to hell is paved with good intentions” and from the Bible “There is a way that seems good to a man but the ends thereof lead to destruction and death”. One parting line (heard it from Susan Sarandon and use it all the time now in many different circumstances) “There’s a fine line between being a sport and playing the fool.” Willful blindness is epidemic in America right now. P.S. I don’t have any illusions that all of our problems exist just between Congress and Wall Street – a whole system of dysfunctional dependencies developed all the way down to Main Street.

Tim Geithner is nothing but a stooge for the banksters, he came from them and back to them he will eventually slink. Then he will write a book about all the unfortunate distasteful (but not illegal) things he was forced to do to save the world.